FATCA: Are US Brokerages, Mutual Funds Bracing For Retaliation?

The US government is becoming more restrictive about how money is managed outside its reach, and it is causing highly regulated independent retail brokerage firms to recoil.

FATCA

According to a recent Wall Street Journal article, Fidelity Investment customers are among a group of asset managers who can no longer buy or trade mutual funds in their brokerage accounts, as a little known rule could start to be enforced.

Global financial regulations, some designed to stop the wonton illegal money transfers to terrorists, drug cartels and rogue nations that was apparent in recent fraud related cases in the HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) and BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) situation, are creating new levels of complexity that appear to be forcing more regulated financial firms to throw up their hands and abandon the regulatory risk and cost of anything close to a regulatory issue.

FATCA regulations making fund managers conservative

Fidelity could be considered a case in point. The Journal article noted that fund managers are becoming more conservative as a result of regulations such as the US Foreign Account Tax Compliance Act (FATCA), among other efforts.

The freeze on foreign trading will only impact 50,000 of Fidelity’s accounts, or an 0.3 percent sliver of their 20 million account sliver. In other words, the FATCA regulatory hassle and risk in managing such a small percentage of customers doesn’t equate to a positive reward. In fact, the regulatory cost of managing “risky” accounts is often considered into brokerage decisions that often run on razor thin margins.

But then the article touched on an even more interesting topic, one that perhaps should run in a headline.

Following large settlements paid to the U.S. by Credit Suisse Group AG (ADR) (NYSE:CS) +0.14%and BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) -0.92% “Other countries are getting angry about the size of the fines and are grumbling about retaliation,” Jonathan Lachowitz, a cross-border investment adviser based in Lexington, Mass., and Lausanne, Switzerland, was quoted as saying in the article.

Big banks in the US remain protected from FATCA regulations

In other words, big banks in the US remain protected and might find opportunity at a time when their European counterparts are being weakened. When considering retaliatory action in European countries, US mutual funds, with are held to a tighter regulatory standards than banks in many customer management regards, could be the next target.

The article exposes the long prohibited but often overlooked prohibition on selling mutual funds to US investors abroad. “It was matter of ‘Don’t ask, don’t tell.’ Now the firms are getting more aggressive about compliance,” David Kuenzi, an investment manager in Madison, Wis., who works with Americans abroad, was quoted as saying.

FATCA regulation changes made in accordance with U.S. anti-money-laundering policies

It’s not just Fidelity. Putnam notes the anti-money laundering provisions to which they would be held to strict account if they violated, likely receiving much harsher treatment and perhaps even individual punishment for executives involved in money laundering. A Putnam Investments spokesperson told the Journal the firm is no longer accepting additional investments into existing accounts held by non-U.S. residents. The spokesman said the changes were made “in accordance with U.S. anti-money-laundering and ‘Know Your Customer’ policies” and in response to recent tightening of European laws limiting sales of funds not registered in their jurisdictions.

While on the surface this issue may seem like one of enforcing tighter money laundering standards on the industry as a whole, it is targeting the most regulated individuals, those that deal with retail customers, and using them as an example and potential retaliatory actions from abroad. Perhaps if justice was administered equally across the board this problem wouldn’t be so significant now.